Updates with post settlement trading prices

By Siddharth Cavale

NEW YORK, May 7 (Reuters) - Oil prices swung between gains and losses in volatile trading on Thursday, ultimately settling lower after a report said Saudi Arabia and Kuwait lifted restrictions on the United States' use of its airspace and military bases, allowing the U.S. to restart operations to escort commercial ships through the Strait of Hormuz as early as this week.

Brent crude futures LCOc1 settled down 1.2% or $1.21 at $100.06 a barrel, while U.S. West Texas Intermediate crude CLc1 futures settled down 0.28% or 27 cents at $94.81. Both benchmarks had earlier declined by as much as $5 a barrel on optimism that Washington and Tehran were moving toward a limited, temporary agreement to halt their conflict.

The global benchmark climbed more than $1 while WTI jumped $2 in post-settlement trading after Iran's Fars news agency said that several sounds resembling explosions were heard near Bandar Abbas city in Iran.

On Thursday, the Wall Street Journal said Saudi Arabia and Kuwait had lifted restrictions on the U.S. military's use of its airspace and military bases, citing U.S. and Saudi officials, and that the Trump administration was looking to restart 'Project Freedom', its operation to guide vessels through the vital Strait of Hormuz waterway this week.

The U.S. and Iran are edging toward a limited, temporary agreement to halt their war, sources and officials said on Thursday, with a draft framework that would stop the fighting but leave the most contentious issues unresolved and center on a short-term memorandum rather than a comprehensive peace deal.

SEB Research analyst Ole Hvalbye said a confirmed deal would probably take Brent back into the $80-$90 price range quickly but a breakdown in talks or a Trump pivot back to strikes, however, would immediately push prices north of $120 a barrel.

While a signed memorandum of understanding might reduce the risk premium in the paper market, it would not have much immediate impact on the high premiums for physical crudes, he said, adding that it would take weeks or months for the market to normalise after an agreement.

On the supply front, Iran appears to have cut back oil production by 400,000 barrels per day and is likely to reduce it further as its storage units fill, U.S. Energy Secretary Chris Wright said in an interview with Fox News on Thursday. A Chinese-owned oil products tanker was attacked near the Strait of Hormuz on Monday, Chinese media outlet Caixin reported, marking the first time a Chinese oil vessel has been attacked.

Earlier in the week, U.S. Treasury Secretary Scott Bessent urged China to intensify its diplomatic efforts to persuade Iran to open the Strait of Hormuz to international shipping, adding that President Donald Trump and his Chinese counterpart Xi Jinping will discuss the subject when they meet next week.

Fallout from the Iran war was a main topic at the Southeast Asian bloc ASEAN meetings on Thursday, with renewed calls for a united front in the face of serious challenges for its fuel import-dependent economies. ASEAN leaders will on Friday call for good-faith negotiations between the U.S. and Iran and a halt in hostilities, according to a working draft of a statement seen by Reuters.